Declining Installation Costs Drive Solar Opportunities

10/01/2010 |

Building owners are also attracted by PACE financing and a hedge against rising prices for nonrenewable energy

People have heard for decades that solar energy is the power source of the future, but that future has always been over the horizon. With recent innovations, government incentives, and other market forces making solar much more viable than even several years ago, its time has come for commercial building owners.

Total U.S. solar electric capacity exceeded 2,000 megawatts (MW) in 2009, as installations added 481 MW of capacity last year, according to the Year in Review issued by the Solar Energy Industries Association (SEIA) in April. Despite the economic downturn, the pace of new installations grew 37% in 2009 over 2008. More than 6,000 MW of installations were in the pipeline at the beginning of 2010.

The fastest growth has been in the residential market, but commercial real estate – both owner-occupied and multitenant – is getting into the act. For example, a Bank of New York Mellon facility gained LEED EB Gold certification in part due to its solar array with an estimated annual output of 103,000 kilowatt-hours (see below).

Stats for a Solar Installation

The Bank of New York Mellon worked with Jones Lang LaSalle, Massachusetts Renewable Energy Trust and National Grid to install a solar energy system at its 385,000-square-foot office complex in Everett, MA. The installation is a direct-tie solar array, meaning the power generated offsets the building's energy usage and reduces peak energy requirements from the utility. State and federal tax credits covered about two-thirds of the cost of the system.Size: 364 solar modules totaling 5,762 square feetEstimated output: 103,000 kilowatt-hours Energy cost savings: Up to $15,000 per yearPayback on upfront cost: Less than 5 yearsAnnual emission reduction: 50 tons of carbon dioxide (CO2) and 425 pounds of sulfur dioxide (SO2)

SEIA reports that prices of photovoltaic modules have fallen 40% in less than two years, from $3.50 to $4 per watt in mid-2008 to $1.85 to $2.25 per watt in the first quarter of 2010. The cost of installation has also fallen by about 10%, and incentives from all levels of government have further defrayed costs.

But lower cost is not the only factor driving solar energy. Government initiatives encourage renewable energy through a combination of mandates on power utilities and incentives for building owners. Solar can also be a hedge in the face of widely expected increases in nonrenewable energy costs.

The Promise of PACE A government program that shows promise is property-assessed clean energy financing (PACE), wherein a municipality floats a bond to finance solar power and other energy projects, and is repaid through higher taxes on the specific properties involved. Owner and tenants alike benefit: PACE financing does not complicate a property sale as private-sector financing arrangements often do, and the increase in taxes is less than the annual energy savings, so the combined tax and operating costs paid by tenants typically decline. At least 21 states have passed legislation enabling municipalities to engage in PACE financing.

Nevertheless, even with such financial benefits, solar does not provide the short payback period and strong return on investment that other energy strategies offer. Most commercial participants tend to have secondary motivations, such as the good will created with employees, customers, and investors, which can translate into better employee recruitment and retention, as well as enhanced sales. A solar power installation can be a visible reminder of a company's commitment to reducing its carbon footprint.

If ownership of a solar installation does not make financial sense, other options exist. One alternative is to buy solar power from a third-party provider that owns, installs, and maintains a solar installation on a building's roof or property. The supplier assumes the financial burden and operating risks, and the owner negotiates a fee for the energy used.

Another option for organizations with large flat-roof spaces, such as a network of warehouses, is to negotiate a solar energy master lease. Under this arrangement, roofs are leased to a solar developer who in turn sells power to utilities. Although the roof owners can purchase solar power for their own needs, most energy is fed directly into the grid. For the right building owners, this can be an optimal strategy for both receiving affordable solar power and generating revenue from unused roof space.

Solar power opportunities are so new and take so many forms that many owners are unable to sort through the options and determine the best course of action. Avoid "analysis paralysis." Develop a thorough yet streamlined process for identifying and executing solar strategies, which often means turning to firms with established expertise.

Dave Gralnik, Senior Vice President of Renewable Energy at Jones Lang LaSalle, leads Solar Power Solutions, part of the firm's Energy and Sustainability Services group. He can be reached at (760) 476-2724 or dave.gralnik@am.jll.com.